capital markets update: hedge funds as a financing source & impact of the credit crunch january...
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Capital Markets Update: Hedge Funds as a Financing Source & Impact of the Credit Crunch
January 2008
IPAA Private Capital Conference
Keith Behrens, Managing Director
Capital Markets Update
222
• Twelve Bankers with over 100 Years Combined Wall Street investment banking experience
• Private equity & debt financings – Raised $2.4 billion through 68 transactions
• M&A strategic advisory services – Advised on 18 transactions valued at $1.9 billion
Energy Capital Solutions LP (“ECS”) is an investment banking boutique, with offices in Dallas and Houston, focused on private capital raising and M&A advisory assignments for mid-size public and private energy companies.
Energy Capital Solutions 2007 Transactions
Credit Facility
$50,000,000Exclusive Placement Agent
Umbria Natural Resources, LLC
Senior Secured Credit Facility
$35,000,000Exclusive Placement Agent
Senior Secured Credit Facility
$18,000,000Exclusive Placement Agent
Senior Revolving Credit FacilityProvided By
$18,000,000Financial Advisor
Senior Secured Credit Facility
$54,000,000Exclusive Placement Agent
Senior Secured Credit Facility
$28,000,000Exclusive Placement Agent
$305,000,000Exclusive Placement Agent
Tranche B Senior Secured Credit
Facility
Exclusive Placement Agent
$120,000,000
Tranche A Senior Secured Credit
Facility
Exclusive Placement Agent
Common Stock
$7,710,006
Private Placement
$54,000,000Exclusive Placement Agent
Series E Convertible Preferred
$30,000,000Exclusive Placement Agent
Private Placement
$100,000,000Exclusive Placement Agent
Sale of East Texas Assets to Devon Energy
Financial Advisor
Has acquired Forest Oil Corp.
Alaska Operations
$460,000,000Financial Advisor
Has acquired the US operations from Santos USA Corp.
$69,000,000Financial Advisor
Has acquired Vaughn Guidance
Systems
$7,000,000Financial Advisor
Exclusive Placement Agent
Private Placement
$15,000,000
Alpine DrillingProgram, L.P.
Mezzanine Debt
Exclusive Placement Agent
$3,750,000
Senior Secured Term Loan and Equipment
Line
Exclusive Placement Agent
23,000,000
Senior Secured Credit Facility
Exclusive Placement Agent
60,000,000
Common Stock
Exclusive Placement Agent
65,500,000
Certified Technical Services, L.P.
Has been recapitalized by SCF Partners and B-29
Investments, L.P.
Financial Advisor
Heartland Oil and Gas Corp.
Has been acquired by Universal Property Development and
Acquisition Corporation
Financial Advisor
Overview of Energy Capital Solutions
Capital Markets Update
3
Current Private Capital Environment
• Have more capital under management than ever; little impact from the credit crunch
Traditional Energy Private Equity Funds
• Traditional Energy Mezzanine Lending
• Hedge Funds Have Entered the Mezzanine Lending Market
Mezzanine Lending Universe has Changed
• Public Companies and Trading
• PIPEs
• Mezzanine / Senior Financing
• Competing with Traditional Private Equity
Hedge Fund Capital Impact
Capital Markets Update
4
• The Energy sector represents an area where hedge funds have been active investors over the past several years.
• Hedge funds have become more selective in their investments in the energy space.
– In upstream investments, focus on development drilling vs. exploration funding.
– In PIPE investments, focus on larger cap stories vs. investing in small cap companies.
• Investment terms tightened over the course of 2007.
• In the following pages, I discuss the importance hedge funds have become as a source of capital for the energy sector, so any pullback by hedge funds could have a material impact in terms of the amount of capital available for the energy sector.
Impact of the Credit Crunch on Hedge Fund Energy Investing
Market dynamics as relates to the credit crunch have impacted numerous funding sources including Hedge Funds, who experienced mixed results in 2007.
Capital Markets Update
5
Institutional Private Equity Sources
Selected Investor Comments
ArcLight Capital Partners Current fund size - $2.5B. Focused on project equity.
Ares Management Current fund size - $4.0B. Interested in energy investments.
Avista Capital Current fund size - $2.0B. Spun out of Credit Suisse.
CCMP Current fund size - $4.0B. Spun out of JP Morgan Chase.
EnCap Investments Current fund size - $2.5B.
Energy Spectrum Capital Interested in midstream, services and E&P drilling investments.
Evercore Interested in energy investments.
First Reserve Current fund size - $7.8B. Interested in energy manufacturing and services, energy infrastructure, and energy reserves investments.
Goldman Sachs Mainly a mezzanine player but have made private equity investments.
Greenhill Capital Current fund size - $1.3B.
Capital Markets Update
6
Institutional Private Equity Sources
Selected Investor Comments
HM Capital Looking at midstream and upstream investment opportunities.
Kayne Anderson Current fund size - $950MM.
Lime Rock Current fund size - $750MM.
Metalmark Capital Current fund size - $5.0B. Spun out of Morgan Stanley.
Natural Gas Partners Current fund size - $2.5B.
Post Oak Energy Capital Private equity energy investing arm for energy of Magnetar, a $6.0B hedge fund.
Quantum Energy Partners Current fund size - $2.0B.
Riverstone Holdings Current fund size - $6.0B.
Touradji Current fund size - $2.0B. Focused on energy.
Warburg Pincus Current fund size - $8.0B.
Westport Energy Partners Funded by Fortress. Focused on project equity investments.
Yorktown Energy Partners Current fund size - $1.5B.
Capital Markets Update
7
• American Capital Strategies
• Black Rock Energy Capital
• BNP Paribas
• CIT Business Credit
• Fortis Bank
• GasRock Capital
• GE Capital
• Goldman Sachs (E&P Capital)
• Guggenheim
• Laminar
Mezzanine Lenders
Lenders
• MacQuarie Energy Capital
• NGP Capital Resources
• Petrobridge
• Prospect Energy
• Royal Bank of Scotland
• Silver Point
• Trust Company of the West
• Union Bank of California
• Wells Fargo
• WestLB
Capital Markets Update
8
Hedge Fund Overview
• Hedge funds are unregulated private investment funds that seek to profit from non-traditional opportunities using alternative investment strategies.
• Hedge funds have a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage.
• This flexibility, which includes the use of hedging strategies, enables hedge funds the ability to best manage investment risks.
• Hedge fund investors include endowments, pension funds, mutual funds and wealthy individuals.
• While the number and size of hedge funds are small relative to mutual funds, their growth reflects the importance of this alternative investment category for institutional investors and wealthy individual investors.
Typical Characteristics of Hedge Funds
Capital Markets Update
9
• There are an estimated 9,000+ hedge funds that have approximately $2.1 trillion under management worldwide and are growing at about 30% per year.
• Dallas / Fort Worth is sixth among global cities with eight $1.0 billion funds accounting for $29.7 billion.
Source: HedgeFund Intelligence
Hedge Fund Overview
Hedge Fund Capital Under Management - Worldwide ($MM)
$10 $50 $56$156
$256$356
$456 $500$600
$900
$1,350$1,500
$2,079
$0
$500
$1,000
$1,500
$2,000
$2,500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
($ in
mill
ion
s)
Capital Markets Update
10
PIPEs Overview
• Private Investments in Public Equity, or “PIPEs”, transactions have increasingly become a popular investment vehicle for hedge funds and a preferred financing strategy for small and mid cap companies over the last five years.
• PIPE transactions are privately issued equity or equity-linked securities that are sold to accredited investors by public companies.
• PIPE investors have traditionally included hedge funds, however they have broadened to include mutual funds, private equity funds, venture capital funds, buyout funds and wealthy individuals.
• PIPE issuers range in size from small OTC Bulletin Board companies to large-cap NYSE-traded companies.
• The PIPE investment structure is ideal for hedge funds because it allows them to establish substantial positions without having a big impact on the stock price.
• A PIPE issue to fund an acquisition is a preferred use of proceeds for hedge funds.
• In 2006, approximately 1,872 PIPE transactions were completed for total proceeds raised of approximately $38.7 billion and 1,940 PIPE transactions were completed in 2007 for total proceeds raised of approximately $50.5 billion.
Capital Markets Update
11
Over the past five years, public companies have raised $188.4 billion in 10,712 transactions (representing an average of $23.0 billion annually in 1,462 transactions).
PIPEs Overview
$22.5
$16.6 $18.4 $18.6 $23.1
$38.7
$50.5
1,290
1,054
1,324
1,642 1,590
1,872
1,940
0
500
1,000
1,500
2,000
2,500
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
2001 2002 2003 2004 2005 2006 2007
PIPE Activity 2001-2007 : Transactions vs. Volume
Vo
lum
e ($
in
bil
lio
ns)
Tra
nsa
ctio
ns
Capital Markets Update
12
Since 2004 energy related companies have raised the most capital from investors in PIPE transactions relative to other sectors.
PIPEs Overview
Source: Private Raise
Energy Resources and Related comprised 23.3% and 31.0% of total PIPE transactions completed in 2006 and 2007, respectively.
$0.4
$0.5
$0.5
$0.6
$0.8
$1.0
$1.1
$1.3
$2.4
$2.5
$2.7
$2.7
$2.7
$4.4
$9.1
$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0
Electronics & Related
Transportation & Related
Auto/Truck & Related
Telco: Equipment
Financial Services: Investment
Financial Services: Insurance
Healthcare: Medical Facilities
Mining & Related
Banks: Savings & Loans
Metals, Minerals & Stones
Pharmaceuticals & Related
Healthcare: Medical Equipment
Biotech: Biomedical/Gene
Banks: Commercial
Energy Resources & Related
2006 PIPEs by Sector
$0.5
$0.6
$0.6
$0.7
$0.7
$0.9
$1.2
$1.5
$1.7
$1.9
$2.7
$2.8
$2.9
$3.0
$12.8
$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0
Electronics & Related
Holding Companies
Telco: Equipment
Real Estate & Related
Healthcare: Medical Equipment
Banks: Commercial
Computers: Misc
Entertainment & Related
Media & Related
Biotech: Biomedical/Gene
Financial Services: Mortgage
Metals, Minerals & Stones
Mining & Related
Pharmaceuticals & Related
Energy Resources & Related
2007 PIPEs by Sector
Capital Markets Update
13
• The substantial increase in the number of hedge funds over the past five years has increased competition for quality deal flow.
• Hedge funds find it necessary to consider alternative opportunities to deploy substantial amount of capital that they have under management.
• Numerous hedge funds are venturing outside of the traditional investments in public companies and looking towards more of what has traditionally been defined as private equity investments in private illiquid companies and other private equity funds.
– Hedge fund managers have participated in private equity transactions in the past and are increasingly doing so as competition for public transactions increases.
– It is important to note that most multi-strategy hedge funds typically have 5-10% of their total capital under management set aside to invest opportunistically.
Hedge Funds Focus on Private Equity
Capital Markets Update
14
• Hedge funds offer issuing companies quick execution and delivery of capital in a timely manner.
• Hedge funds typically do not require control positions in companies.
• Hedge funds are interested in private equity transactions for a couple of reasons:
– They have substantial discretionary capital that needs to be deployed and they need to find new investment arenas in which they can generate returns.
– As many traditional hedge fund strategies have become crowded in the last few years, managers are seeking to invest in less competitive areas and in areas where they can generate returns.
– Funding an acquisition is a preferred use of proceeds for hedge funds looking to invest in a private equity offering.
Source: Hedge Funds World 12/15/05
Hedge Funds Focus on Private Equity
Capital Markets Update
15
The following is a list of selected hedge funds that consider, or have previously made, investments in private energy companies:
• Ableco Finance (2)
• Advisory Research (1)
• Angelo Gordon & Co. (1) (2)
• Atalaya Capital (2)
• Blue Wave (1)
• Carlson Capital (1) (2)
• Centaurus (1)
• Cerberus (1)
• D.B. Zwirn (1) (2)
• Elliott Advisors (1)
• Eschelon (2)
Hedge Funds Focus on Private Capital
• Farallon (1) (2)
• Gas Rock Capital (2)
• GLG (1) (2)
• GSO Capital (1)(2)
• Guggenheim (2)
• HBK (1) (2)
• Laminar Direct Capital (DE Shaw) (1) (2)
• Laurus Funds (2)
• Och Ziff (1)
• Petrobridge Investment Management (2)
• Placeholder (1)
• Polygon (1)
• Post Oak Capital (2)
• Promethean Capital (2)
• Ramius Capital (1)
• Reservoir Capital (1)
• SAC Capital (1)
• Sandelman (1) (2)
• Silver Point Capital (1) (2)
• Third Point (1)
• Touradji (1)
(1) Focuses on Equity
(2) Focuses on Mezzanine Debt
Capital Markets Update
16
Pacific Energy – Case StudyTransaction Summary
• March 9, 2007 – ECS was engaged by Pacific Energy Resources Ltd. (“Pacific Energy” or the “Company”) as its exclusive financial advisor to advise the Company on the acquisition of Forest Alaska Operating, LLC (“FAO LLC”) and Forest’s Other Alaskan Assets (“FOC Assets”) (combined “Forest Alaska”) and raise the financing necessary to complete the acquisition.
• May 15-22, 2007 – Pacific Energy and Forest Oil executed the PSA on May 22, 2007 for an anticipated total consideration of $460.0 million.
Summary
• Acquisition Price – $460.0 million.
• Transaction Structure – Total consideration consisting of $400.0 million in cash, 10.0 million shares of common stock in Pacific Energy valued at $25.5 million and a seven year seller note to Forest with a net present value of US$30.0 million
• Fairness Opinion – ECS provided its opinion (the “Fairness Opinion”) to the Board of Directors of the Company as to the fairness of the consideration to be paid by the stockholders of Pacific Energy in connection with the transaction from a financial point of view.
Transaction Highlights
• Strong Financial Sponsorship – The Company’s existing lenders, Silver Point Finance, LLC and Goldman Sachs & Co., were approached by ECS and Pacific Energy to provide a $425.0 million bridge loan to finance the transaction and provide additional working capital for development.
• Quick Execution – Silver Point and Goldman Sachs enabled the Company to submit an LOI that proposed an expeditious close of the transaction which strategically positioned Pacific Energy to be chosen as the winning bidder.
Pacific Energy Resources, Ltd.
August 2007
$460,000,000The undersigned acted as Exclusive Financial Advisor
and Placement Agent.
has acquired the Alaskan Assets of Forest Oil Corp.
Pacific Energy Resources, Ltd.
July 2007
$464,000,000
has acquired the Alaskan Assets of Forest Oil Corporation
The undersigned acted as Exclusive Financial Advisor and Placement Agent
to Pacific Energy.
Pacific Energy Resources, Ltd.
August 2007
$460,000,000The undersigned acted as Exclusive Financial Advisor
and Placement Agent.
has acquired the Alaskan Assets of Forest Oil Corp.
Pacific Energy Resources, Ltd.
July 2007
$464,000,000
has acquired the Alaskan Assets of Forest Oil Corporation
The undersigned acted as Exclusive Financial Advisor and Placement Agent
to Pacific Energy.
Capital Markets Update
17
Debt Financing – On December 28, 2005, ECS raised $13 million of capital in the form a $5 million convertible note and an $8 million secured term note to fund Pacific Energy’s acquisition of a working interest in Shell’s Pacific Creek, Wyoming project.
Debt Financing – On June 29, 2006, ECS raised $21.5 million of capital in the form of a secured term note to fund Pacific Energy’s acquisition of Carneros Energy, Inc. for a total consideration of $26.2 million.
Equity Financing – On November 29, 2006, ECS raised $85 million of common equity and obtained a $100 million credit facility to fund Pacific Energy’s acquisition of AERA’s (50/50 JV between ExxonMobil and Shell) offshore Beta Unit.
Pacific Energy Resources Case Studies
Pacific Energy Resources, Ltd.
has raised
$85,000,000 of Common Equity
and obtained a
$100,000,000Credit Facility
The undersigned acted as a Placement Agent and Financial Advisor.
PACIFIC ENERGYPACIFIC ENERGY
December 2006
Pacific Energy Resources, Ltd.
June 2006
Secured Term Note with Equity
Participation Interests
$21,500,000
The undersigned acted as Placement Agent.
PACIFIC ENERGY
December 2005
The undersigned acted as Placement Agent.
Pacific Energy Resources, Ltd.
Convertible Term Note
$5,000,000
Secured Term Note
$8,000,000
PACIFIC ENERGYPACIFIC ENERGY
Capital Markets Update
18
Transaction Summary
• January 10, 2007 – ECS was engaged by Barnes Barnett, LLC to raise capital to develop the Company’s acreage in the Barnett Shale.
• March 30, 2007 – The transaction closed with a $100.0 million Senior Credit Facility.
Summary Terms
• Transaction Size – $100.0 million.
Transaction Highlights
• Quick Execution – The Company received the capital commitment from the investor less than three months after ECS was engaged.
• Expanded Transaction – Barnes Barnett was initially seeking capital to develop 10,000 acres. The investor funded most of the Company's existing 10,000 acres, an additional 10,000 acres and the drilling program for all 20,000 acres.
Barnes Barnett Case Study
Barnes Barnett, LLC
has obtained a
$100,000,000
Senior Credit Facility
The undersigned acted as a Placement Agent .
March 2007
www.energycapitalsolutions.com
www.energycapitalsolutions.com
Russell Weinberg
Managing Director
Ron Montalbano
Managing Director
Brad Nelson
Managing Director
Keith Behrens
Managing Director
Scott Trulock
Director
Chris Czuppon
Vice President
Jonathan Shepko
Vice President
Josh Wolf
Vice President
Brandon Neff
Senior Associate
Michael Chiste
Associate
Benjamin Baldwin
Associate
Joseph Allio
Analyst
Dallas Office: 2651 N. Harwood, Suite 410 Dallas, Texas 75201 214-219-8200 Houston Office: 1990 Post Oak Blvd., Suite 1370 Houston, Texas 77056 713-933-0380
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